Starting and maintaining non profit organizations

Starting and Maintaining Nonprofit Organizations Attorney Ronald Nesbitt, LL.M., Tax Public Allies Friday, 04/29/2011

AgendaStarting and Maintaining Nonprofit Organizations Nonprofit and tax exempt status Creating the Bones for a Great Organization The 501(c)(3) Application Jeopardizing tax exempt status IRS Compliance Activity 5/29/11 2 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Nonprofit and Tax Exempt Status Starting and Maintaining Nonprofit Organizations Nonprofit Organization Fla. Stat. 617 – Corporation Not for Profit Corporations for any lawful purpose or purposes not for pecuniary profit and not specifically prohibited to corporations under other laws of Florida. 5/29/11 3 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Nonprofit and Tax Exempt Status Starting and Maintaining Nonprofit Organizations Nonprofit Organization: Examples Corporations whose purposes include, without limitation, charitable, benevolent, eleemosynary, educational, historical, civic, patriotic, political, religious, social, fraternal, literary, cultural, athletic, scientific, agricultural, horticultural, animal husbandry, and professional, commercial, industrial, or trade association purposes. But nonprofit organizations are not automatically tax-exempt. They must file a special application with the IRS, requesting to be exempt from paying Federal tax. Some states also require a separate filing in order to be tax-exempt from paying state taxes. 5/29/11 4 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Nonprofit and Tax Exempt Status Starting and Maintaining Nonprofit Organizations Tax Exempt Organizations Internal Revenue Code 501(c)(1) – (28), (d)(religious org) or 401(a) – Qualified Pension, Profit-Sharing, and Stock Bonus Plans 5/29/11 5 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Nonprofit and Tax Exempt Status Starting and Maintaining Nonprofit Organizations Tax Exempt Organization A business that does not have to pay Federal taxes is considered to be "tax exempt.” Examples of 501(c)(3) organizations: Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations 5/29/11 6 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations Organizational Infrastructure Bet on the Jockey and the Trainers Benefits of Directors and Advisors 5/29/11 7 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations Have a Clear Vision Mission Purpose Reduce the Vision to a Plan 5/29/11 8 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations Light the Way to Success Through Order Articles of Incorporation Bylaws Corporate Governance 5/29/11 9 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations By-Laws The Board of Directors (“The Board”) shall consist of not fewer than three (3) persons, and of not more than a maximum number determined in the Constitution or By-Laws of the Corporation as amended from time to time 5/29/11 10 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations Majority. A majority is fifty-one (51) percent or greater. Term. The term of each Director shall be established in the Constitution or By-Laws. Unless otherwise provided, each Director shall serve on the board for an indefinite period of time. Election. Unless the Constitution or By-Laws provide differently (in which case such Constitution or By-Laws shall control), Directors shall be elected by the remaining Directors by a majority vote upon the expiration of a Director’s term or a vacancy for any reason. 5/29/11 11 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations Corporate Governance Audit Committee CONTRACT REVIEW AND SIGNATURE AUTHORITY POLICY BOARD OF DIRECTORS CORPORATE GOVERNANCE GUIDELINES COMPANY POLICY STATEMENT ON REPORTING AND PROTECTION FROM RETALIATION 5/29/11 12 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations Audit Committee – Corporate Governance (a) To assist the Board in its oversight of (1) the quality and integrity of the Company's financial statements, financial reporting and disclosure controls and procedures, including internal controls; (2) the performance of the Company's internal audit function; and (3) the Company's compliance with legal and regulatory requirements; (b) To interact directly with and evaluate the performance of the independent auditors, including to determine whether to engage or dismiss the independent auditors and to monitor the independent auditors' qualifications and independence; and (c) To prepare annually the report(s) required by the by State and Federal laws. 5/29/11 13 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations CONTRACT REVIEW AND SIGNATURE AUTHORITY POLICY Corporate Governance This policy defines and describes the guidelines and procedures to be followed by officers, managers and other employees of ______ (the "Company") for creation and review of contracts to which the Company will be a party and designates who, within the Company, is to authorized to sign contracts on behalf of the Company. This policy also describes the procedures that must be followed with respect to retention and administration of contracts to which the Company becomes a party. 5/29/11 14 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations Share the Vision Unseen, Untold…Unsold 5/29/11 15 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Creating Good Bones Starting and Maintaining Nonprofit Organizations Meet and Measure Regularly Scheduled Organizational Meetings Measure What You Do, What You’ve Done and Adjust 5/29/11 16 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

The 501(c)(3) Application Starting and Maintaining Nonprofit Organizations 30 + Page Application $400 for organizations whose gross receipts do not exceed $10,000 or less annually over a 4-year period. $850 for organizations whose gross receipts exceed $10,000 annually over a 4-year period. 5/29/11 17 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

The 501(c)(3) Application Starting and Maintaining Nonprofit Organizations Section 501(c)(3) requires that your organizing document state your exempt purpose(s), such as charitable, religious, educational, and/or scientific purposes. 5/29/11 18 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

The 501(c)(3) Application Starting and Maintaining Nonprofit Organizations Section 501(c)(3) requires that upon dissolution of your organization, your remaining assets must be used exclusively for exempt purposes, such as charitable, religious, educational, and/or scientific purposes. 5/29/11 19 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

The 501(c)(3) Application Starting and Maintaining Nonprofit Organizations The Application is a Planning Opportunity “Using an attachment, describe your past, present, and planned activities in a narrative.” 5/29/11 20 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

The 501(c)(3) Application Starting and Maintaining Nonprofit Organizations The Application is a Planning Opportunity Financial Data Ideas About Sources and Uses of Funding (Page 9 - 10 of 1023) 5/29/11 21 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

The 501(c)(3) Application Starting and Maintaining Nonprofit Organizations BEWARE: Public Inspection of Exemption Applications, Annual Returns, and Political Organization Reporting Forms 5/29/11 22 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations There are five types of activities that can jeopardize that status. Private benefit or inurement Lobbying Political campaign activity Activities generating excessive unrelated business income (UBI) Failure to comply with annual reporting obligation 5/29/11 23 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],Private Benefit: 501(c)(3)s must avoid all activities that will benefit substantially the private interest of any individual or organization. Instead, the 501(c)(3)’s activities must serve a public interest. Private Inurement: The concept of inurement takes the notion of private benefit further. Code section 501(c)(3) states that no part of an organization’s net earnings may inure to the benefit of a private shareholder or individual. This means that a 501(c)(3) organization is prohibited from allowing its income or assets to accrue to insiders. 5/29/11 24 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],Lobbying is activity designed to influence legislation . A 501(c)(3) is attempting to influence legislation if it contacts, or urges the public to contact, a member or employee of a legislative body to propose, support, or oppose legislation, or if the 501(c)(3) advocates or opposes legislation. Beware of Lobbying Ceiling for Organizations that have made an election and normally make lobbying expenditures and are not disqualified (churches) 5/29/11 25 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],501(c)(3)s are prohibited from engaging in any "political campaign activity"—that is, directly or indirectly participating or intervening in any political campaign on behalf of or in opposition to any candidate for public office. This includes making contributions to political campaign funds or making public statements for or against the candidate. But SeeCitizens United & 501(c)(4) organizations 5/29/11 26 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],501(c)(4) organizations may lobby for legislation; they may also participate in political campaigns and elections, as long as campaigning is not the organization's primary purpose. Contributions to 501(c)(4) organizations are not deductible as charitable contributions. 501(c)(4) organizations are not required to disclose their donors publicly. Civic Leagues, Social Welfare Organizations, and Local Associations of Employees 5/29/11 27 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],UBI is income from a regularly-carried-on trade or business that is not substantially related to the organization’s exempt purpose. Three-Part Test: A trade or business Regularly carried on Not substantially related 5/29/11 28 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],A hospital pharmacy furnishes supplies to the hospital in accordance with its exempt purpose, but it also sells to the general public. Sales made to the public are treated separately as an unrelated trade or business. A tax-exempt organization solicits, sells, and publishes advertisements for commercial vendors in its publication. Even though the publication contains content related to the organization’s exempt purpose, the publishing of advertising is still an unrelated trade or business. 5/29/11 29 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],If the activity shows frequency and continuity and is conducted the same way that a non-exempt organization would run a similar business, it is regularly carried on. 5/29/11 30 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],A hospital auxiliary operates a health food stand for one week at a preventative health education conference. Because the activity is a one-time occurrence and is unlikely to compete with for-profit health food stores that operate year-round, the activity is not “regularly carried on.” However, if the hospital auxiliary operates a health-food stand daily at the hospital, that is likely the regular conduct of a trade or business. 5/29/11 31 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object]

Any income-producing activity that does not directly furtherthe organization’s exempt purpose could generate UBI.

Sometimes, activities that ARE related to exempt purposes can still generate UBI if they are conducted on a larger scalethan is reasonably necessary to perform an exempt function. In this instance, the portion that is more than needed is considered an unrelated trade or business.5/29/11 32 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

If the hospital auxiliary health food stand operates daily, it will likely generate both related and unrelated business income.

Sales to hospital staff and patients could escape UBI tax—due to an exception explained later—while sales to the general public would be subject to UBI tax.5/29/11 33 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],Volunteer workforce Convenience of members Sale of donated merchandise Distribution of low-cost articles Convention or trade show activity Sponsorship Traditional bingo 5/29/11 34 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Jeopardizing Tax Exempt Status Starting and Maintaining Nonprofit Organizations ,[object Object],While 501(c)(3)s are exempt from Federal income tax and unemployment tax, most of them will have information reporting obligations. These are met by filing Form 990, 990-EZ, or 990-N. In addition, 501(c)(3)s may also be liable for employment taxes [such as Form 941 taxes], unrelated business income tax, excise taxes, and certain state and local taxes. 5/29/11 35 Attorney Ronald Nesbitt, LL.M. Tax Source: IRS.gov

Starting and maintaining non profit organizations

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